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Institutional Equities

GMR Infrastructure
13 December 2013 Reuters: GMRI.BO; Bloomberg: GMRI IN
We had a meeting with the management of GMR Infrastructure (GMRIL) recently to discuss the companys ongoing projects, its funding, deleveraging and future prospects. Following are the key highlights: Commissioning and ramp-up of power projects on track: GMRILs expansion plan for coal-based power plants is on track and the recently commissioned projects are progressing well. The EMCO 600MW project (coal-based) commissioned both its units and has already signed a power purchase agreement (PPA) for 550MW (including 150MW with Tamil Nadu government), operating at a plant load factor (PLF) of 35%. Two units (700MW) of the Kamalanga power project are operational and its third unit of 350MW will be commissioned by January 2014. It has already signed a PPA for 800MW, with firm coal linkage for 500MW. Unit 1 of the Chhattisgarh power project is likely to be operational by April 2014 and Unit II by December 2014. All this will increase total coal-based power generation capacity to ~3,000MW by FY15E and the full benefits will materialise in FY16. Value unlocking in power generation and airport segments: GMRIL is in the process of unlocking value in its two verticals, airport and power generation, through initial public offer of equity shares, thereby providing an exit opportunity for PE (private equity) investors and raising funds for future capex. We expect the company to first list its airport business, as this is profitable and also regulatory clarity on most issues has already emerged. Strategic sale of assets in progress: GMRIL expects gross debt to peak out at ~Rs450bn in FY15E post completion of ongoing projects and witness reduction by Rs100bn over FY14E-FY15E. It has already cut debt by ~Rs55bn via divestment of assets - a 70% stake in GMR Energy (Singapore), and a 74% stake each in two road projects - and is in discussions with various parties for divestment of road projects, Turkey airport and some power generation projects in order to reduce debt further. Key future value drivers: Adequate gas availability for power generation projects, land monetisation at Delhi airport, positive development relating to return of refundable security deposit on real estate at Delhi airport, dual-till method of tariff at Hyderabad airport, arbitration on Male airport project and further divestment of assets are key developments that can drive GMRILs performance going forward. Upgrade rating on GMRIL to Hold from Sell: We have revised our estimates for the power generation segment (higher PLF considering the recently signed PPAs and fuel supply agreement), resulting in an upward revision in our EBITDA estimate by 12% for FY15, but pushing up capitalisation charges and thereby restricting the improvement in profitability. This led to a revision in our SOTP-based TP on GMRIL from Rs18 earlier to Rs24, upgrading the rating on it from Sell to Hold. We believe GMRIL is in the right direction with its focus on debt reduction via divestment of assets, value unlocking and focus on low-capex projects. However, poor profitability will limit the upside.
Y/E March (Rsmn) Net sales YoY (%) EBITDA EBITDAM (%) Adj. net profit (excl. E.O. items) Adj. EPS P/BV (x) EV/EBITDA RoE (%) RoCE (%) FY11 57,738 26.4 15,553 26.9 (1,313) (0.34) 0.90 17.0 (12.0) 1.5 FY12 76,420 32.4 17,582 23.0 (4,413) (1.13) 0.90 20.6 (8.0) 1.3 FY13 83,054 8.7 24,772 29.8 (4,827) (1.24) 0.87 16.6 3.8 2.5 FY14E 85,306 2.7 28,747 33.7 (10,159) (2.61) 0.97 16.6 (14.9) 2.3 FY15E 1,07,676 26.2 40,821 37.9 (1,640) (0.42) 0.99 9.9 (2.5) 3.8

Sector: Infrastructure CMP: Rs22 Target Price: Rs24 Upside: 9%
Amit Srivastava +91-22-3926 8116
Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$bn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) One Year Indexed Stock Performance
140 130 120 110 100 90 80 70 60 50 Dec-12

Management Meet Update

3,892.4 86.4/1.4 25/11 8,823,731









Price Performance (%) 1M GMR Infra Nifty Index Source: Bloomberg 0.9 3.6 6M 12.7 8.3 1 Yr 20.3 5.9

Source: Company, Nirmal Bang Institutional Equities Research

Please refer to the disclaimer towards the end of the document.

Institutional Equities
Other highlights
Focus on ALAR (asset light asset right) strategy to continue: In FY13, GMRIL shifted its focus from a large and diversified asset portfolio to the ALAR model in order to combat economic slowdown and deleverage its balance sheet. The ALAR strategy includes divestment of mature assets as well as valueeroding assets, recycling of equity capital released from divestment of such assets into new quality assets requiring low capex, value engineering in existing assets and focus on cash profit rather than future cash flow. The company plans to continue with its ALAR strategy for another two years. Airport segment is profitable and is ready for value unlocking GMRIL expects monetisation of the remaining 190-acre plot at Delhi airport to commence post clarity on the matter relating to return on refundable security deposit on real estate. The current land monetisation rate is around Rs1.5bn/acre (net present value or NPV) as compared to earlier monetisation at an average Rs0.9bn/acre (NPV). Hyderabad airport currently operates on single-till method and the company has filed an appeal with the appellate tribunal for dual till method. It expects a favourable decision soon. Turkey airport has turned profitable and it expects robust traffic growth to continue led by traffic shift from other airports. All the three airport projects of the company (Delhi, Hyderabad and Turkey) are profitable and traffic growth has improved, primarily led by higher international traffic. The company expects IPO of this business segment in CY14, thereby providing an exit opportunity for PE investors and also raise funds for future capex. However, all depends on the market conditions. Monetisation of 1,500acre of land at Hyderabad airport is on hold because of poor economic activity.

Power generation segment In FY15, the companys 3,000MW coal-based power plant is expected to be operational, driving the operating performance in FY16, but because of higher capitalisation charges the profitability is likely to subdued. The Rajahmundry 768MW project is complete, but it is lying idle following unavailability of natural gas which led to restructuring of debt till FY14. The company expects to get an extension in this regard of one year - till FY15. Gas price hike and incremental gas being transferred to the power generation segment (as the requirement of gas by fertiliser plants is frizzed) will improve gas availability. The company is negotiating with PE investors in the power generation segment for restructuring of investment terms. It expects a favourable deal. GPCL Chennai-based power project is expected to get an extension for another three years. The EMCO project has finalised its 150MW PPA with the Tamil Nadu government at Rs4.91/unit. Highway projects The company has commissioned the Hyderabad-Vijaywada road project, whose toll collection is around Rs6.5mn/day against expectation of Rs8.0mn/day following poor economic activity in Andhra Pradesh and the overall slowdown in India. The Hungund-Hospet project has commenced toll collection at two plazas out of three toll plazas (to be fully operational by March 2014). All road projects are self sufficient for debt and interest repayment barring the Ambala-Chandigarh road project. Other details GRILs gross debt is likely to peak at Rs450bn in FY15E post completion of all active projects, with the airport segment accounting for Rs107bn, power generation segment Rs270bn, highway segment Rs55bn and remaining others. The company is not concerned about project debt, as it is backed by project cash flow. However, an area of concern is Rs65bn of debt at the corporate level which has been used for equity funding of projects.

GMR Infrastructure

Institutional Equities
Change in our earnings estimates and TP We have maintained our earnings estimates for FY14 but revised upward for factoring higher PLF for recently commissioned projects led by recently signed PPA, firm linkages and imported coal on pass through basis. This has led to increase in our net sales estimate by 6% and EBITDA estimates by 12% for FY15. However, we have further increased the capacity charges which will restrict the improvement in profitability and expect net loss of Rs1.6bn against our earlier estimate of Rs2.9bn. We have improved our PLF for life cycle of the two projects (EMCO and Kamalanga) and factored the fuel supply through firm linkage and imported coal on pass-through basis which has improved the power segments valuation in our TP from Rs1/share to Rs6/share. This has led to increase in our SOTP based TP from Rs18/share to Rs24/share. Exhibit 1: Change in our earnings estimates
(Rsmn) Net sales EBITDA RPAT Earlier 85,306 28,747 (10,159) FY14E Revised 85,306 28,747 (10,159) Deviation (%) Earlier 1,01,356 36,501 (2,960) FY15E Revised 1,07,676 40,821 (1,640) Deviation (%) 6.2 11.8 -

Source: Company, Nirmal Bang Institutional Equities Research

Rating track
Date 26 September 2011 29 September 2011 11 November 2011 11 November 2011 18 November 2011 6 January 2012 12 January 2012 9 February 2012 10 April 2012 1 June 2012 17 July 2012 13 August 2012 4 October 2012 15 November 2012 7 January 2013 12 February 2013 5 March 2013 9 April 2013 11 April 2013 3 June 2013 9 July 2013 16 August 2013 14 November 2013 Rating Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Hold Buy Buy Buy Buy Sell Market price (Rs) 28 27 26 23 21 23 28 31 29 21 24 21 25 20 20 18 19 22 21 21 18 13 21 Target price (Rs) 39 39 39 39 39 39 39 39 39 30 30 30 30 27 26 24 25 25 25 25 25 20 18

GMR Infrastructure

Institutional Equities
Stock Ratings Absolute Returns
BUY > 15% HOLD 0-15% SELL < 0%
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GMR Infrastructure